Starting with US politics, it’s interesting that the debate has switched, in some circles, from whether Trump will pull off a ‘Brexit’ styled surprise win, to whether the Republican party should go into full-scale damage limitation mode. Political strategists are now evaluating the prospect of a clean sweep for the Democrats (ie. control of the Oval office, the House and Senate) and as Sarah Isgur-Flores (Carly Fiorina’s deputy campaign manager) put it this week, ‘the race for the White House is over, now it’s just a question of the collateral damage’. I am not sure that once the dust settles and we start focusing on increased regulation whether markets will take inspiration from this.
The key sticking point here is the Democrats' ability to take the House. On current projections, they are expected to take 10-15 seats, with the hurdle rate being 30. Still, greater representation here seems likely. However, it is interesting that William Hill yesterday reported that 71% of all money bet on who would win the presidency was placed on Clinton, but 65% of individual bets was actually placed on Trump. Sounds remarkably like the UK referendum, when it was the sheer volume of money that drove the odds heavily towards ‘remain’.
US headline inflation to rise from here
Away from politics, US markets have provided Asia with a healthy platform from which to progress, although our index calls are quite neutral. In terms of the key take-outs, US inflation data showed a nice 40 basis point increase at a headline level to 1.5%, while UK inflation also increased nicely too. Core inflation (in the US) came in at a modestly below expectations of 2.2% and with it we have seen expectations for a December rate hike falling modestly to 62% (from 65% yesterday). There is a strong belief now that inflation is going to head higher in the months ahead, predominantly because of the base effects of oil. Assessing the year-on-year gains in US crude, we can see price some 45% from December and even more so when price bottomed in January. So we are talking about a huge tailwind in the coming months from base effects. Inflation, especially headline inflation, should move nicely higher from here and likely catch up with core inflation levels.
We’ve also seen a slew of earnings reports (including Goldman Sachs) and once again whether one is looking at the underlying earnings or the sales lines, companies are beating the analysts’ estimates. We’ve seen some calming of concerns with the US volatility index down 7% at 15.1, while modest buying of US treasuries has resulted in a second day where the heat seems to be coming out of the recent US dollar rally. Oil prices are a touch higher from yesterday’s ASX 200 close at $50.29, but I still hold a neutral bias to risk, with price action on the S&P 500 still struggling to break back above 2140. I will turn bullish on a move through 2180 and outright bearish below 2116.
Intel reported after the bell with good Q3 gross margins of 64.8% (vs. 63% eyed), however Q4 revenue guidance of $15.2 billion to $16.2 billion (vs. $15.9 billion) seems to be uninspiring for traders and the shares are down 3% in after-hours trade.
ASX opening calls
As things stand our call for the ASX 200 open sits at 5420, which suggests a slightly higher open. Both BHP and CBA’s ADR (American Depository Receipt) suggest flat opens, which makes sense given the broader index call and iron ore being largely unchanged at $58.41. SPI futures are currently up 13 points from the 5pm overnight re-set. Japan and Hong Kong also look to be in the same boat, with uneventful opens.
China the key focal point
Interestingly, if we look at the ASHR ETF (China CSI 300 index ETF), we can see this has rallied 2% on the NYSE, while our China A50 cash market is looking fairly bullish as well. After market closed yesterday, we saw stronger-than-forecast China financing data, with M2 money growth running at 11.5%, however new loans rose to RMB1.22 trillion (vs. consensus of RMB1 trillion), helping lift aggregate finance to RMB1.72 trillion. We saw a reasonable pick up to new loans for the household sector, while there was a strong shift in demand for credit from corporates. This data all looks supportive, but the real focus (at 1pm AEDT) now turns to today's data dump, with Q3 GDP expected to remain at 6.7%, while September industrial production (consensus 6.4%), retail sales (10.7%) and fixed asset investment (8.2%) looking to improve a touch.
AUD/USD will subsequently be keenly watched by traders today, as will copper, and good China numbers today could see AUD/USD push back into the $0.7700 area by the opening of the UK/EU markets and a level where traders have been very happy to sell into since August. As I told a few clients yesterday, the comments from Dr Lowe yesterday that it’s not the RBA’s job to keep inflation in the 2-3% band at all times are remarkable and supportive of the AUD.